Tax in a Transparent World

Last updated 6 November 2019

Jeremy Hirschhorn, Second Commissioner, Client Engagement
Delivered at CFO Live event hosted by the Australian Financial Review and Group of 100 in Sydney
7 November 2019
(Check against delivery)

Good afternoon. It’s a pleasure to be here today. I would like to acknowledge this morning’s keynote speakers and panellists and recognise the AFR and Group of 100 for organising today’s event. I would also like to acknowledge the attendance of Deputy Commissioner Rebecca Saint who heads up our Public Groups division – the people who manage the relationship with our largest taxpayers – many of whom are in the room here today.

Today represents an excellent opportunity for CFOs to hear from big thinkers and policy makers. This morning’s sessions have set the scene, encouraged us to consider the big picture, and encouraged us to think differently. We’ve heard about the critical role of finance teams in ensuring sustainability, and we’ve been reminded about the critical function of independent audit in the fallout of the Royal Commission.

Continuing the theme of looking at good governance and sustainability through a new lens, today I’m here to speak about the importance of tax transparency: for the ATO, taxpayers and the community. I would also like to encourage you – as CFOs – to think about tax in the broader context of your roles.

The transparency (or opacity) of tax information has been a matter of significant public debate over the last five years in particular, with a paradigm shift away from the concept that tax privacy is absolute. In Australia alone, there have been a range of measures aimed at increasing tax transparency to the public:

The corporate tax transparency measure, under which the ATO reports the gross accounting income, taxable income (really taxable profit) and tax paid of the largest companies.
The voluntary tax transparency code, with 161 companies having lodged reports.
The requirement for some significant global entities to lodge general purpose financial statements (even where they may not trigger ASIC requirements).

Globally, there have also been a range of industry-led initiatives, with the extractive industries being the first movers. The Extractive Industries Transparency Initiative has set the global standard to promote the open and accountable management of oil, gas and mineral resources and requires the disclosure of information along the extractive industry value chain.

Additionally, some of Australia’s largest companies have banded together under Transparency International Australia. This is a global coalition that has been set-up to fight corruption and promote transparency, integrity and accountability at all levels and across all sectors of society, including in government.

I would like to make three initial observations on the focus on tax transparency of large companies.

Firstly, the tax performance of large companies is important to the Australian economy. There are about 1,620 large corporate groups with a turnover of more than 250 million dollars in Australia. Their number is comparatively small, yet the impact they have on revenue is significant and equivalent to about 14 per cent of total tax collection each year. Last year (2017–18 financial year) these taxpayers contributed around 62 per cent of all corporate income tax reported, about $51 billion or so, up significantly from about $44 billion the previous year (primarily off the back of high commodity prices).

Beyond their tax contribution, our largest taxpayers also play a critical role in the tax system as community perceptions of their compliance underpin willing participation in other markets – especially to small business and individual taxpayers. We know the community’s interaction with the tax system is directly impacted by their perception of compliance of the large market: tax compliance by large corporates sends a clear signal to other taxpayer groups about fairness. And this is where transparency comes in.

Secondly, I think it would be a mistake to view this simply or solely related to societal concerns about tax and whether large companies are “paying their fair share”. Rather, from a purely personal perspective, I would posit that tax is merely a symptom of a broader societal change in expectations of access to information. For many of us in the room who remember the world before the internet, information was rare and expensive to obtain: this was the natural order of things. For those who have grown up with the internet, information is readily available and usually free: the absence of information is deeply suspicious.

Flowing from this, I would suggest that the community no longer accepts that only debt and equity holders deserve to have access to information about significant participants in the Australian economy.

Thirdly, it is easy to focus simply on transparency in the sense of publication of taxpayer specific information, however, there have been significant developments in other aspects of tax transparency:

transparency to the administrator;
transparency cross-border between different countries’ administrators;
transparency of the administrator to the public as to the overall health (or otherwise) of the system;
transparency of the administrator to the company on its stance on key issues and view of the taxpayer; and
transparency within companies, including between management and the board and to shareholders (and even staff).

In the limited time available, I will focus on transparency of the administrator to the public, before coming back to the tax transparency of individual companies both within themselves and to the public. I have set out some comments on other elements of transparency in the written paper.

Transparency of the administrator to the public as to the health of the system

Every year, the ATO, like other government agencies, produces an Annual Report. It sets out how the ATO has performed in the year, including its own financial statements, its management and accountability, its performance against a range of non-revenue based measures and its revenue performance.

Traditionally, the reporting of tax system health was relatively limited, with a focus on revenue collections and audit yield. Unfortunately, this does not provide much information as to the health of the system – a high audit yield could be a signal of a very healthy system (high voluntary compliance, most non-compliance being caught), but also the opposite (low voluntary compliance, some non-compliance being caught).

Recognising that Australians deserved more information as to the health of their tax system, the ATO now annually publishes system level information such as:

Tax gap/tax performance estimates across market segments and taxes: these estimate how much of the tax payable according to law is paid voluntarily, how much as a result of compliance action, and how much goes unpaid, and
Tax and Corporate Australia: a detailed analysis by sector, ownership and other lenses of the tax performance of large companies.

I would recommend taking some time to peruse this information, if not in your professional capacities but also your capacity as Australians with an interest in your taxation system.

In terms of the large market, there is some good news: our most recent estimate (for the 16–17 year) is that large companies paid about 92% of the tax due at lodgment, increasing to 96% after compliance activity. This is improving from prior years, which were already at globally high levels. (However, flipping it the other way, we estimate that large companies did not pay $2b of tax due, even after compliance activity of $2b.)

Our aspiration is to increase this level of performance to 96% correct at lodgment and 98% after compliance activity.

I note that calculation and publication of this type of data is very sensitive or even uncomfortable for a revenue authority, as you are putting effort into publishing information which shows that you are not perfect and have more to do. However, in my view it is necessary if you are to provide your citizens with a realistic picture of the health of their tax system.

Another area where we have worked to increase transparency is around settlements with large public and private businesses.

Of course, due to taxpayer privacy, we cannot publish details of particular settlements. However, we acknowledge that Australians have a legitimate interest in assuring themselves that the ATO is not doing “sweetheart deals” with the “big end of town”, so we have taken the following steps:

Every year, we publish the aggregated settlements by market segment (number and value) in our Annual Report (noting that large market settlements are “lumpy”, over the last four years, the average “discount” on settlement for public and multinational businesses was about 35% versus 52% across all other markets).
For every large settlement, we have a retired Federal Court judge (from a panel of judges) review the settlement to independently determine whether the outcome reached was a fair and reasonable outcome for the Australian people, and report the results in our Annual Report.
On appropriate matters, we encourage the taxpayer to publish broad details of the settlement (both in relation to the past and the future) so that the public can have additional insight to (and hopefully confidence in) the settlement.

Interestingly, despite the strength of Australia’s corporate tax system and these world-leading levels of tax compliance, our latest community perceptions survey shows that a little more than forty per cent of big businesses are believed to be paying the correct amount of tax (an increase, but off a low base). This compares to about ninety per cent of an individual’s family and friends.

This is a key reason why we see a benefit in being transparent about the tax behaviour of our largest payers.

General transparency of administrator to taxpayers

This is an area that is developing rapidly.

Under traditional models of administration, taxpayers lodged their return, information testing that return was subsequently obtained by the administrator, and administrator action (or inaction) followed.

Now, as information is available to the administrator in real or near real time, this puts a challenge to the administrator in relation to transparency.

Unless there are good reasons to the contrary, the ATO is moving to a model where that information is brought to the attention of the taxpayer as early as possible in order to help the taxpayer avoid unnecessary mistakes, for example, (relevant to individuals and small business):

We seek to “pre-fill” returns based on the information we hold or, even if we don’t have complete information, to put in reminders that taxpayers may have sold assets or have had other tax relevant events during the year.
If deduction claims differ significantly from peers, under the “nearest neighbour” model taxpayers will be advised of this prior to finalisation of their tax return.
Where we receive information which suggests taxpayers may have missed items, at first instance advising them and giving them an opportunity to update the return.

There are challenges though: for example when information may tip-off a deliberate tax evader or reveal a sensitive source; or when it may make our risk models too exposed and open to abuse.

Transparency of administrator to large companies

Under the “justified trust” program, the ATO is performing what might loosely be described as “tax due diligence” on Australia’s largest companies, and has a better, more comprehensive understanding of these companies’ affairs than ever before.

As part of this, we are more transparent with companies as to the areas of assurance and the (hopefully limited) areas of concern, providing a detailed review report to the company at the end of the review. We are also periodically publishing information on the program as a whole, which allows companies to understand how they stand relative to their peers.

In terms of specific issues, we are also trying to be more transparent.

As a developed, open economy, with significant inbound and outbound investment and trade, Australia necessarily has a complex tax system applying to large corporates.

Many of the most significant tax issues relate to cross-border dealings and their pricing, whether it be physical trade or the borrowing of money. These must be “transfer priced” on an arm’s length basis not “transfer mis-priced”. For the Australian economy, the key issues are around in-bound loans and applicable interest rates, exports of commodities and in-bound distribution businesses.

We recognised that companies had to determine transfer prices and, in the absence of practical ATO guidance, were often (inadvertently) entering into positions that we viewed as high risk.

As such, the ATO has been much more deliberate in exposing its risk analysis and frameworks to the taxpaying community. These are often in the form of “Practical Compliance Guides”, which set out rules of thumb for determining whether the ATO is likely to accept the price at face value, or will more deeply probe whether the price makes sense in the particular circumstances.

This transparency allows companies to make informed decisions as to the risk profile that they wish to adopt, rather than potentially inadvertently taking on tax risk.

Transparency across borders between revenue authorities

In an increasingly globalised tax landscape, we are collaborating with our fellow revenue authorities and building our capacity to protect against threats to the integrity of the system. We’re sharing data and intelligence across borders like never before, in almost real time.

A lot of this is focused around sharing information to fight tax evasion, that is, the deliberate hiding of assets and income from revenue authorities, so of less direct relevance to large companies.

Our Commissioner chairs the Joint International Tax Shelter Information and Collaboration (JITSIC) Network. JITSIC brings together forty of the world’s national tax administrations to collaborate on current domestic and international tax risks. This work puts the network in a good position to respond to data leaks, such as the Paradise Papers, in the future. I expect that, if anything, data leaks will become more frequent as citizens become more concerned with financial transparency and ensuring that people and institutions pay their fair share of tax.

In addition to domestic data-matching arrangements, we also work with our global partners to share data and intelligence in a combined effort to detect, disrupt and deal with offshore tax evasion including transnational tax crime and money laundering. Together with our counterparts in the United States, Canada, the Netherlands, and the United Kingdom, we’re a member of the Joint Chiefs of Global Tax Enforcement – the J5.

The J5 is getting tangible results on a global scale thanks to transparency. There have already been hundreds of data exchanges between J5 partners, with new data exploitation technologies being developed which are helping us identify and share new leads.

In September 2018 we received the first round of data from foreign jurisdictions under the new Common Reporting Standard. The new data has uncovered more than 1.6 million accounts in over 73 foreign tax jurisdictions. We now have data on more than 100 billion dollars identified as being held offshore by Australian taxpayers.

There are two measures which are more directly relevant to large companies:

Country-by-Country (CbC) reporting helps us understand international structures and tax settings through more comprehensive exchanges of information between countries. Australia is currently one of the eighty tax jurisdictions signed up for the multilateral competent authority agreement for CbC reporting. To date we have received almost five thousand CbC reports thanks to automatic exchanges with over fifty tax jurisdictions.
International Exchange of information (EOI) is another key transparency mechanism used to achieve international co-operation in tax matters. It involves exchanging tax-related information with our treaty partners that is relevant to the administration and enforcement of each other's domestic tax laws.

So it’s clear that we’re exchanging vast amounts of data with our overseas counterparts.

Transparency to the administrator

Australia has always had an environment of high transparency to the ATO.

Income tax returns and related schedules like the International Dealing Schedule mean that the ATO has had significant insight into the tax affairs of large companies, often more than other countries.

Like other areas of transparency, this has increased over the last five years, including:

The Reportable Tax Position Schedule has been re-energised and expanded, asking very pointed questions as to whether particular Taxpayer Alert arrangements have been entered into, and the “risk zone” of positions under Practical Compliance Guides.
We are also seeking more insight into companies’ internal tax governance frameworks, and how well that governance framework is “lived” under the “justified trust” initiative.

Transparency within companies

Five years ago, our observation was that there were significant variances in tax governance between large companies.

In practice, there have been stark instances where a chair or board member approaches the ATO seeking to understand why their company seems to have a bad relationship with the ATO when they believe that the company is “tax conservative”. Acknowledging that the ATO sometimes makes mistakes and jumps at shadows, in most cases it becomes clear that the company’s tax affairs and settings have been opaque to its own board.

This is one of the reasons why we have so strongly encouraged companies think about their tax governance frameworks and move beyond the “we rely on our very clever head of tax” model. In other words, being able to demonstrate how your good tax governance is embedded in positions taken, disclosures in returns and tax calculations provides both the company and us with evidence that the company is doing what it means to do.

When working with our largest corporate taxpayers, we look for evidence that a tax control framework exists, like a board-endorsed tax policy, documented procedures for preparing returns, including income tax returns and Business Activity Statements, or a testing program to validate the operating effectiveness of the tax control framework.

Once we’ve established a tax control framework exists, we then look for objective evidence that the framework is designed effectively and is “lived”.

In all too many cases, we see taxpayers with stated conservative risk frameworks enter into aggressive tax structures. We can only assume that insufficient consideration has been given to the risk framework and/or contradictions with the risk framework have not been brought to the board’s attention.

We also see taxpayers with governance positions stating that they will fully co-operate with the ATO in the provision of information taking aggressive positions around legal professional privilege to hold back information.

To reach our highest rating for tax governance (stage three) you must be able to demonstrate that your tax control framework has not only been designed effectively, but is also operating as intended. This stage can be evidenced by a periodic tax controls testing program as well as reports describing the outcomes of that testing. We seek an independent review and testing of tax controls, for example by internal or external auditors that provide an independent level of assurance to the audit committee and the Board.

At the other end of the spectrum, we may assign a “red flag” where you cannot provide evidence to demonstrate a tax control framework exists or if we have significant concerns with your tax risk management and governance. These concerns may include your approach to tax compliance, for example, where there are significant errors your tax control framework is not detecting.

Our Tax risk management and governance review guide sets out principles for board-level and managerial-level responsibilities, with examples of evidence that entities can provide to demonstrate the design and operational effectiveness of their control framework for tax risk.

Our guide – which is on our website – aims to help you understand what we believe better tax corporate governance practices look like. It can help you can develop or improve your own tax governance and internal control framework, test the strength of the design of your framework against our best practice benchmarks, and understand how to demonstrate the operational effectiveness of your key internal controls to your stakeholders, including the ATO.

I would respectfully suggest that a board member (and possibly even significant shareholders) should understand, at the very least:

the tax governance framework;
the risk stance and structural tax settings of the company;
the current (and historic) relationship with the ATO;
where profits are not fully taxed, and whether that relates to explicit policy concessions or “grey zone” tax planning (from both accounting profit and cash paid perspectives), or even that the profits are not considered high enough quality to be taxable (yet?).

And if a “tax infrastructure” question comes up to Board, I would suggest some potentially useful questions:

Is the position consistent with the risk appetite of the organisation?
Is the ATO likely to dispute this position? Have you sought certainty from the ATO in the form of a ruling?
What would happen to revenue collections if everyone did this?
What is our level of confidence as compared with that required on our physical infrastructure (with like levels of economic exposure)?
(To the adviser) have you been given a full scope, or are there areas that have been scoped out that are relevant?
Are the facts and assumptions underpinning the advice supportable and could be evidenced in Court proceedings? What happens if they are wrong / disproved?

As an aside, and touching on the earlier session on auditor independence, in my experience companies have not always grappled well with disclosure of tax disputes, as compared with other provisioning / contingent liabilities for operational problems. Reflecting on this, I think this may reflect that a finance function may be “closer” to the dispute and not as independent as, say, in relation to a “normal” operational exposure. This requires an even stronger independent audit role than normal, but this too can be compromised if the auditor has been involved in the tax advice underpinning the dispute.

To change speed, and taking the opportunity of being in a room of CFOs, I would suggest that a tax often with minimal internal visibility / transparency is GST. I suspect that, due to the nature of how it is accounted for, and that it initially developed from bottom up systems in a rush in 1999–2000, we find that some of even the largest companies make inadvertent (but cumulatively significant) system-based errors. Accordingly, we are currently working to develop a “top down” analytical methodology to provide comfort that GST obligations are broadly correct, focusing first on businesses with sales subject to GST. We hope that, over time, all major companies will either embed this or a similar “top down” check into their GST processes to provide themselves (and us) with visibility and confidence that their GST obligations are about right.

Transparency to the public

As mentioned in the introduction, there have been a range of measures aimed at increasing tax transparency to the public:

the Corporate tax transparency measure, under which the ATO reports the gross accounting income, taxable income (really taxable profit) and tax paid of the largest companies;
the Voluntary tax transparency code, with 161 companies having lodged reports;
the requirement for some significant global entities to lodge General purpose financial statements (even where they may not trigger ASIC requirements).

I do not propose to walk through each of the measures in detail, but will reflect on the community response and some personal observations as to best practice.

The corporate tax transparency measure is produced annually and, in fact, the fifth release is scheduled for early to mid-December. The information provided in relation to each company is limited. At the time of release, the ATO also prepares significant information and analysis at a population level to assist the community position the raw company by company information. Many companies will also prepare some form of contextual information.

The voluntary tax transparency code is, as the name suggests, voluntary. The best reports provide excellent insight, but it is fair to say that the quality of reports is quite variable, and I will make some further comments below.

For certain Significant Global Entities (broadly more than $1bn gross income), there is a requirement to lodge general purpose financial statements (if they do not already do so). In practice, this can technically often be satisfied by producing whole of group GPFS of the ultimate offshore parent, which provides little insight into the Australian operations.

Taking a step back, I would put forward the proposition that “limping in” to these requirements is not the right strategy for a large company operating in Australia (or globally) today. Rather, I would suggest that a forward thinking large company would reflect on the underlying driver, namely the community appetite to have an understanding of the largest participants in the Australian economy. This implies using these specific measures as a floor to be built on, not a ceiling to aspire to.

Best practice may look something like the following:

aggregated financial statements of all your Australian operations (whether or not they have to be consolidated under strict accounting rules);
a level of information consistent with General Purpose Financial Statements;
clear explanations of both accounting effective tax rates and cash effective tax rates, with explanations as to the structural reasons where they differ;
clear explanations of where profit is booked around the world, and the tax rates applicable (and tax paid); and
disclosure of disputes with revenue authorities.

I strongly recommend that every CFO pull out the BHP tax performance report to see what is possible.

Conversely, I strongly recommend that tax transparency not be seen as some form of marketing response. This may work in the short term, but increases medium to longer term risks. Warning signs include:

primary responsibility for tax transparency is in the marketing or public relations area;
the VTTC focuses on economic contribution and taxes withheld on behalf of others before it discusses corporate taxes;
multiple sub-groups with a variety of accounting approaches (whether GPFS, SPFS or less) with no over-arching bridge to explain the overall operations, then “limping in” to tax transparency requirements.

Some general observations on transparency

Although in no way professing to be an expert on transparency, I would like to finish with some general observations on being a large organisation striving to be transparent (derived from both observing other companies but also as a leader in the ATO):

Firstly, transparency is hard, and by providing additional information, it is of course possible that others will deliberately or accidentally misuse that information;
However, with current views as to access to information, a lack of transparency will also be used against you: in my view, the risk of saying something is less than the risk of saying nothing.
If you are concerned about making your (tax) actions transparent, you do not have a transparency problem: you have an action problem.
It is dangerous to have a “media” strategy, as this encourages “nuancing” (spin?). One should aim for a “doing the right thing transparently” strategy.
Being transparent publicly provides strong signalling and discipline across an organisation: it shows your people that you mean what you say.
Transparency benefits those doing the right thing: it makes it harder for others to hide in the shadows, and focuses the attention of scrutineers.

Thanks for having me and I look forward to taking a couple of questions now from Edmund. Please feel free to talk to either me or Rebecca during the afternoon break.

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